Douglas Emmett Inc (DEI) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Second Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will directly follow management's prepared remarks. At that time, instructions will be provided to queue up for questions.

I would now like to turn the conference over to Ms. Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you for joining us for our second quarter 2007 earnings conference call. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer; Mr. Bill Kamer, Chief Financial Officer; and Mr. Andres Gavinet, Executive Vice President of Finance. If you do not have a copy of the earnings package, you may access it on the Company's Web site at douglasemmett.com.

During the course of this call, management will be making forward-looking statements. We caution investors that any forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. The actual outcome will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual results may be -- can be expected to differ from our expectations and those differences may be material.

For a more detailed description of these risks, please refer to the Company's press release and the current SEC filings, which can be accessed in the Investor Relations section of the Douglas Emmett Web site.

Please note that the market data sources that are reflected in management's prepared remarks are CD Richard Ellis for the Honolulu and Los Angeles office markets, REIT for the Los Angeles office markets, NPF Research for the Los Angeles multi-family market, and Property and Portfolio Research for Honolulu multi-family market.

With that, I would now like to turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thank you, Mary. Hello, everyone, and thanks for joining us today. Before we get into our quarterly earnings results and operating statistics, I would like to begin with a brief update on the status of our overall business strategy. Our core internal growth remained strong. Operating and market fundamentals continued to improve, with solid leasing velocity and higher starting rents, which is demonstrative of the strong supply-and-demand fundaments inherent in our sub markets. For this reason, we remain optimistic about the long-term vitality of our portfolio, as well as the potential external growth opportunities that these targeted sub markets will eventually produce.

In the midst of one of the strongest real estate markets that we have seen, our operational team is focused on enhancing organic growth through proactive management initiatives, such as improving the economic terms of our leases, increasing parking and storage income, and reducing downtime and re-tenanting situations. For example, during the second quarter, we were successful in implementing fixed annual increases of 4.5% in most of the new leases that we are executing in our Sherman Oaks/Encino sub market. As you may recall, we moved fixed annual increases within our West Side sub markets up to 4.5% earlier in the year. In addition, we are now obtaining fixed rent start dates in approximately half of our new leases, resulting in less downtime.

Acquisition opportunities remain a challenge, as aggressive underwriting assumptions and pricing are still quite prevalent in our markets. With that said, we recognized that great real estate trades infrequently. So, when it does, it provides an opportunity that needs to be very carefully evaluated. There are also opportunities resulting from our market concentration and operational expertise. They are typically off-market and smaller.

Further, we feel, like many others in our industry, that our stock price is well below our net asset value and has been for some time. The recent decline in stock prices within the REIT sector has made this proposition even more compelling. As a result, we recently repurchased approximately $154 million of our equity. We will continue to evaluate the benefits of future buybacks. However, we have no further commitments at this time.

With that said, I will now provide you with a brief update on the L.A. and Honolulu markets. Office occupancy in L.A. County remained relatively flat from the prior quarter, dropping 10 basis points to 91.2%. Office occupancy in Honolulu County decreased 20 basis points to 91.9%. Within the 10 sub markets where Douglas Emmett's office properties are located, occupancies increased to 94.4% compared to 94.1% at March 31, 2007.

We continue to see increases in office rental rates. During the second quarter, L.A. County rents increased by 3.9%, and Honolulu County rents increased by 1.1%. The rental rate increase within the 10 sub markets where our properties are located was more robust, with average asking rents rising 6.6% during the second quarter. Within our office portfolio, the rental growth metrics continued to strengthen throughout the second quarter.

On a mark-to-market basis, the spread between our asking starting rents to our in-place cash rents grew to 33.9%, up from 25.7% in the first quarter. On a straight line basis, the average rent from leases signed during the second quarter compared to the average rent from leases expiring for the same space increased to approximately 34.8% from 31% during the first quarter.

On a cash basis, comparing the beginning cash rent from newly signed leases with the ending cash rent from expiring leases for the same space, office rental growth was approximately 16.5% in the second quarter, up from 14.7% in the first quarter.

Finally, our multi-family portfolio was more than 99% occupied at June 30, 2007. Rent from newly signed leases increased by approximately 6.1% over rent from expiring leases for the same space, excluding rent roll increases resulting from our significantly below market rent control units.

I will now turn the call over to Bill Kamer, who will provide more detail on our second quarter operating results. After Bill's remarks, we will take your questions. Bill?

Thanks, Jordan. For the quarter ended June 30, 2007, FFO totaled $48.7 million or $0.29 per diluted share. Office rental revenues increased sequentially 1.4% to $92.9 million in the second quarter from $91.6 million in the first quarter. While multi-family rental revenues increased sequentially 2.2% to $16.9 million in the second quarter from $16.5 million in the first quarter.

In last quarter's call, we indicated that we are anticipating lease expirations and tenet move-outs during the second quarter, which would result in a temporary decline in our occupancy. In fact, the lease percentage of our office portfolio increased 50 basis points to 95.7% during the second quarter, while occupancy dropped 80 basis points to 93% during the same period. The difference between leased and occupied is represented by approximately 310,000 square feet that was subject to signed leases or for rent that's not yet commenced as of June 30.

The decline in occupancy as of June 30 is primarily attributable to the expiration of one 81,000 square foot lease which occurred on April 30. As mentioned last quarter, approximately 68,000 square feet of this space has been re-leased with rent expected to commence during the third quarter.

In addition, second quarter occupancy was impacted by six lease defaults, aggregating approximately 64,000 square feet. About 40,000 square feet was leased to two separate subprime tenants, and the balance was from tenants outside of the mortgage industry. Strong increases in our rental rates during the quarter helped to offset the decline in occupancy.

On the expense side, total interest was $38.3 million in the second quarter, relatively flat from the first quarter. We incurred approximately $725,000 of higher interest expenses in the second quarter, which directly relate to an additional $150 million debt financing that we closed at the end of May. This additional interest expense was offset by an adjustment that reduced our swap amortization in the second quarter to $2.9 million compared to $3.6 million in the first quarter. We anticipate that swap amortization should be around $4 million per quarter for the remainder of 2007.

For the second quarter, based on our current evaluation of the ongoing real property tax reassessment process, we reduced the accrual for real property taxes and for tenant recoveries. These accruals continue to serve only as estimates and may be adjusted accordingly in the future as we continue through this process.

The current capital expenditures for the second quarter were $0.08 per square foot in our office portfolio, compared with $0.06 per square foot in the first quarter. Recurring capital expenditures increased to $129 per unit in our multi-family portfolio in the second quarter, compared to $80 per unit in the first quarter. As previously stated, we expect that we will incur the bulk of our 2007 capital expenditures in the second half of the year. By year end, our 2007 recurring capital expenditures should approach our anticipated annual CapEx levels of approximately $0.50 per square foot for our office portfolio and $600 per unit in our multi-family portfolio.

On the operational side, we had considerable leasing activity during the second quarter. We entered into approximately 156 new and renewal lease transactions comprised of over 570,000 square feet of office space. Our overall office portfolio was 95.7% leased at June 30, 2007, up from 95.2% in the first quarter.

Our net absorption for the second quarter was approximately 52,000 square feet. Our TIs, leasing commissions, and other capitalized leasing costs during the quarter totaled $18.60 per square foot on a blended basis between new and renewal leases, compared with $20.34 on a blended basis in the first quarter.

Turning now to capital transactions. On May 29, we increased our borrowings with Fannie Mae by $150 million. The annual interest rate on these incremental borrowings, taking into account the applicable floating to fixed interest rate hedges, is approximately 5.87%. Several maturity dates were also extended, and now range from June 1, 2012 to June 1, 2017.

Our total outstanding debt at June 30, 2007 was $2.9 billion. All of our debt, excluding our secured line of credit, is swapped to an effective fixed interest rate of 5.2%. At June 30, 2007, our debt-to-total market capitalization was 41.8%.

On May 11, we acquired an office building located at 1801 Century Park West in Century City for a contract price of $32 million. In conjunction with this acquisition, we obtained the ground leasehold in the property and the option to acquire fee title to the land for a fixed price of $800,000. The building is approximately 50,000 square feet and is currently 100% leased through December 2019.

Finally, as mentioned earlier, through July 31, 2007, we have repurchased approximately 6.4 million share equivalents for an aggregate purchase price of approximately $154.4 million, which represents an average price of approximately $24.26 per share. This has resulted in a diluted share count of approximately 159.3 million shares as of July 31.

Taking into account the capital transactions that I have described, as well as our updated operating results, we are revising our full-year 2007 FFO guidance range. Our new range is $1.14 to $1.17 per diluted share. Our prior guidance ranged from $1.12 to $1.16 per diluted share. This guidance excludes the impact on our operating results from future acquisitions or dispositions, additional equity purchases, debt financings or other recapitalizations, or additional potential changes to real property tax accruals.

With that, I will now turn the call over to the operator so we may take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Michael Bilerman with Citigroup. Please go ahead.

Hey, guys. Jon Litt is on the phone with me as well. Bill, can you just go into -- you talked about the accruals on the expenses that you lowered them. Can you just give us a sense of the change from the first quarter in terms of how much lower the accruals are?

On the accruals -- as you know, Mike, we have not been giving out -- breaking out the -- our real property tax accruals for good business reasons, and so we are not going to begin doing that at this point.

Well, I am not asking for the totality, but at least the change to really understand, I mean, just like maybe your multi-family -- your multi-family went down $1 million a quarter sequentially and your office went down $1.8 million. Is it fair to say that all that $3 million is change in the accruals?

I think it's fair to say that all of it is, but it played a real role in it.

Wouldn't that have -- if you take the $3 million, that's almost $0.02 or let's say $2.5 million, and it's almost $0.02 a quarter going forward. Shouldn't that have a bigger impact on your guidance?

No, I think $0.02 a quarter is a little bit too much. Actually in Q2, what you are also seeing is the timing of some of our scheduled repairs and maintenance on some of the projects that are going to have scheduled for this year have not fully hit us yet. We have not completed some of those scheduled repairs and maintenance. So, I think that the numbers that you are seeing in Q2 are still a little bit light as far as the run rate if you were to use (inaudible).

Maybe you can just share with us at least the timing of those rolls that happened in the second quarter, and then the 300,000 square feet, the spread between your occupied and lease, when that expects to come back into the portfolio?

Okay, this is Bill Kamer, and let me talk about that. On the 310,000 square feet that's leased but not occupied, about two-thirds of that is scheduled to come online during Q3 in the balance after that point.

And what sort of rental levels?

I think we gave -- we gave for the leases signed last quarter, we gave those comparisons about -- I don't know, I gave them actually in my part.

I mean, if you are asking which -- the breakdown of which markets they are in and therefore the different rental rates for that, I don't have that.

Well, I am just trying -- in totality, how much pickup you are going to have, but also try to understand what's coming out of -- I think you said that the second quarter, you saw and felt the full impact of the rolls. And so, I am just trying to figure out how the trend line, the run rate coming into the second quarter?

Let me -

That 309,000 is going to come in right around 36 [bucks] a quarter on an annual basis, you know, [$2] a month starting rent.

Another thing that might be helpful to you is, the significant part of that issue related to the 81,000 foot lease that expired April 30th, so if you think about, two months of that pretty much wasn't in Q2, and it's -- it pretty much flips in Q3. The bulk of the rent comes on stream by August 1. So, you pick up about two-thirds of it in Q3, and then in Q4, we would have the full [part] for the full quarter.

Okay. And then just a final question on the buyback, how many different parties your unit holders did you buy that back from?

Well, we bought share equivalents back from a variety of sources. But, I don't think -- more than once certainly, many.

All right. I just didn't know if there was any single shareholder or institutional shareholder in that group unit holder that made up the majority of that 6.4 in any way, and how you sort of -- the whole in terms of were they contacting you, did you reach out to them? Because I see this wasn't shares being bought back, it was units.

Well, the actual details of that process, we had some -- we had some debate about describing what we had done or not. And at least where we left it last, we are not going to -- we may do it on the next call if there is -- in a quarter if we decide, well, this is meaningful. Your question has -- is focused on how it might impact overhangs. I can talk to you about that a little bit. But, it's -- but those particular details at least at this time, we are not going to go into.

I am just wondering if you fulfilled all that demand, just trying to get a sense of how all this -- what triggered all that happened?

I mean that's a good question, which is the overhang, you are asking whether it did impact the overhang that could be coming up in the next -- end of the year. And from discussions that we have had with some of the old investors, the best that I can tell is that they -- there isn't any more overhang among them than there would be among anyone else that is following the stock price and making their decision based on that stock price in any particular time, whether they went to sell or not. So, it's very hard to predict -- impossible to predict whether we did anything that would have substantially impacted where people come out once their shares are registered.

But, they could have just converted into common and sold the common. They didn't have to come to you guys to -- for the buyback?

They would be able to do that at the end of October, yes.

So, at the end of October, if there is some unmet demand, we might see some of that happening without you guys being in the process?

I would -- I would expect that.

Okay.

Will it be enough to have any impact, I don't know.

Okay, thank you.

Our next question comes from Jimmy Feldman with UBS. Please go ahead.

Thank you very much. Can you talk a little bit more about what you think the impact from subprime businesses will have on market conditions in your area, and in the portfolio specifically?

Sure, Jimmy. As we have said on prior calls and in -- and in various other presentations with you guys, the impact, even kind of putting the clock back a quarter, is that we have very -- very low exposure to the subprime industry, and to the extent that it is, it's kind of scattered around the portfolio. As I mentioned on the call, we did have two defaults, which we frankly were anticipating when we have spoken before, that have fallen out. And we have very, very little subprime exposure left. And based on where we sit now -- and obviously, we monitor not just people in the mortgage industry, but the entire tenant group on a regular basis, gives us potential defaults. And at the moment, we are not anticipating any significant defaults during Q3.

And what about just the impact on the general market, what's your view there?

The impact of --?

I mean outside your portfolio.

In the markets we are in, I don't believe that subprime tenants are significant players. And so, to the extent that they allocate, which -- and maybe they are allocated -- I don't think there would be even an appreciable impact that you may not even notice one, at least in the markets we are in.

Okay. And then turning to the acquisition during the quarter, could you just walk us through kind of what the investment idea is there? I mean, you are -- sounds like you pretty much paid full market for a bond through 2019, is there any more upside to that earnings stream?

Yes, it's a -- I mean, it's a deal that -- when we put it together, it's a -- I mean, I am not sure I understand your question. Obviously, I think that the -- is outside the earnings and I think that the value of the buildings is going to go up, and I think that we made a good deal. What beyond that are you asking?

Well, I guess what's the -- I mean, you planned to redevelop the building. Is there land attached, or you basically just bought the building and you will have the earnings stream through 2019?

We basically bought the building, set up that earnings stream. Although I got to tell you, we have done many deals with [barter] tenants, and things are going to change even though you have that lease in place. It's an outstanding building, and we made the decision in terms of that purchase based more on the building than the lease, because it's a great building in Century City. It's a not a very big deal, [I was sure] had it been a larger deal.

Okay. And then I guess a similar question, are you seeing any better acquisition opportunities based on what's happening in the credit market?

I wish I were, but so far -- and we watch it like a hawk -- I have not seen any. I mean, if you are asking whether cap rates are floating up or price per foot is floating down, I have not seen it at all.

Okay, great, thank you very much.

Thanks, Jimmy.

Our next question comes from Michael Knott with Green Street Advisors. Please go ahead.

Hey, guys. Bill, can you just comment a little more on the expense increases -- I am sorry, decreases sequentially? I thought I heard you say that it's not mostly the reduction in the accruals for Prop 13?

Actually, I was talking then, I said it's not all that. There is a number of things going on. So, it's not strictly that, although that plays a very large role.

Can you just comment on -- give us a flavor for what caused the reduction outside of the accruals?

Outside of the accruals.

Well, we have some things. We had lower utility costs than we had -- utility costs had gone up sequentially, but they were lower than we had anticipated, because we anticipated some higher rates. A number of the other items did go up in the quarter. We had some lower payroll costs in the quarter.

That multi-family margin sustainable, that you recorded in 2Q?

If you adjust it for seasonality going forward, thinking that for Q3 and Q4, I think we have a little bit more on a scheduled -- maintenance schedule. So, it should be slightly down therefore, not down that much. It should be kind of beginning to be a good run rate for the year multi-family, assuming that our current adjustments that we do for property taxes and what not do not get adjusted in the future.

Okay. And Bill or Andres, were there any lease termination fees in the quarter?

Very little, almost nothing.

Not in this quarter, no.

If you remember, it was like $180,000 last quarter and it's like $20,000 this quarter.

Yes.

And then on the overhang issue, I was -- my recollection was that it was a 14-month time period from the date of the IPO. It sounds like it is 12, based on what you said earlier?

Actually -- just go ahead, do you want answer technically this one?

Yes, the simple version, OP units is 14 months, a pure 14 months. The registered -- the stock is unregistered until we file an S-3. We are obligated under registration rights agreement to file an S-3 not later than 14 months from the effective date of the -- from October 30, when the IPO happened. But, as a practical matter, as of the one-year anniversary of the IPO, which is October 30th, the unregistered shareholders would be free to sell under the Rule 144 exemption.

Okay, and then lastly, Jordan, your comment that opportunities should be especially considered, should we take that to mean that Blackstone maybe getting closer to selling the West L.A. portfolio?

Boy, you are -- I am not going to comment on anything that Blackstone is doing, but I think that -- more what I meant by that comment is the thing that preceded it, in the sense, which is what they are -- I mean, prices are very high now, and maybe justifiably so. But, at a time like this, when prices had moved up so dramatically, I am being very careful about acquisitions, but there are properties out there that I still feel would be a good acquisition, and that's what I meant by that comment. Now, they need to come available, and then we need to get in there and buy them, but we would be working on doing that for the right properties.

Thank you.

Our next question comes from Rich Anderson with BMO Capital Markets. Please go ahead.

Hi, thanks, everybody. Just some basic stuff here, Bill, maybe for you. Last quarter, you mentioned I believe 5.09% average cost of your debt, and is that apples-to-apples with the 5.2% that you mentioned this quarter?

Yes, the $150 million additional debt is the 5.87% but blended that up.

Okay. Andres, can you break out the FAS 141 income between office and multi-family?

Yes, for this quarter?

Yes.

Yes, for this quarter, on the office rent side, we have approximately I want to say, I think $7.6 million, just under $7.7 million. And on the residential side, it's just under $2 million, about $1.9 million.

Okay.

And then on -- there is one more smaller component to that, which is on the ground lease expense side, we also have a small FAS 141 adjustment that reduces that cost. That's about just under $400,000 on a quarterly basis.

$400,000 on a quarterly basis, okay. Do you guys have an estimate of what same-store growth might have been, if everything was in place this time last year?

That's a difficult one for us. We have tried to do it -- I mean, a year ago, we were extremely managed, and for us to kind of approximate that number, we will have to make a tremendous number of assumptions that would render that -- it would yield that statistic to be pretty much whatever you wanted it to be.

That would be pretty -- this is Bill again, it would be pretty worthless, and we kind of consistently said we are just going to have to -- you have to be patient with us and let us roll through some more quarters with that meaningful same-store comparisons of prior periods.

Okay. And just to make sure I understood the 34.8% GAAP increase in same space rent, that's from the leasing activity that, you, Douglas Emmett, did during the quarter, is that correct?

That is correct.

Okay. I just wanted to make sure I understood that.

Last question, you mentioned the buyback and with the lack of opportunity out there from an acquisition standpoint, we are estimating an implied cap rate of about 5% on your stock. I don't know if that's sort of where you are seeing it. But, I guess the question is, what is your bogey hurdle, whether it's buying back stock or buying property? What makes -- at what point do you get comfortable that you could start looking at an asset? Is it something at 5% or more, or is it lower than that?

Well, we are certainly looking at deals as they are becoming available. Obviously, our -- we feel that our stock is trading at a significant discount NAV. So, that is a very good prospect for us. There is also, as I said, real estate deals out there that we may have a strong interest in, and so we can kind of compare the range of opportunities that we have and make decisions in sort of graded way, and that's how we decide whether we are going to buy back stock or whether we are going to buy a building, or what we are going to do with our debt structure.

But, the 5% implied cap rate, is that in the range of what you see on your stock right now?

I don't -- I mean, when people start to try to take cap rates and particularly apply it to the income coming off a REIT, I mean, the cap rates I look at aren't easily derived, I believe, from REIT numbers. There is a huge amount of differences, and the cap rates that are bandied about are based on for sale packages that don't have the expenses in it and have adjustments of property tax and a lot of other things. So, I mean, I don't want to make a comment about where I see the cap rate in our portfolio, because I don't think we would be talking about the same thing.

Okay, that's a fair comment. A lot of your peers in the office sector and elsewhere have been commenting that they are not seeing any rise in cap rates at this point. It sounds like you are certainly not seeing that, or are you seeing a flattening out of cap rates, and let's talk specifically about West L.A.?

Yes, everything you said, I mean, I am really -- I am reading your guys' stuff, I am reading all the same stuff everybody is reading about the debt markets. And believe me, I am looking for cap rates to start to rise in an opportunity, but I am not seeing it at all. And I am watching every transaction very carefully. We are involved in many of them with what's going on, and I just haven't seen any of the predictions that people have been making about the private side sort of backing up a little bit and letting real estate values decline. I haven't seen it at all.

Now, you asked about flattening, and we are talking about the West Side here. I don't see them decreasing, but I've got to tell you, there is not enough deals for me to give you a [grade stat] on that. But, my instinct is that they have settled, but settled at a very low number. And from all the reading I do, I would think maybe they'd back up a little bit. But, I haven't seen any of it.

Okay, what about in Honolulu office?

The trades in Honolulu that I could extrapolate from have been heavily weighted down by ground leases. And so, I don't -- I mean, and they had only been -- there is only one or two data points. It is not enough there to make -- there is not enough there for me to say -- to make a comment.

Okay, thanks very much.

All right, Rich.

Our next question comes from Chris Haley with Wachovia. Please go ahead.

Good morning.

Hi, Chris.

Hi, Chris.

Hope you guys are doing well, thanks for your comments on -- appreciate your color in terms of how you underwrite deals, as always.

I am interested in the timing of the buyback in relation to the additional debt. As an analyst, I will look at the marginal cost of the borrowing versus the marginal rate of return on your new investment, and it would appear to me to be somewhat of a wash or dilutive. So, I am interested in why you made that decision to add $150 million worth of debt, secured debt to repurchase equity at the prices you did?

This is Bill. The -- here is what I think. As Jordan said, as a general proposition, we remain and are increasingly interested in looking at the delta on value between our stock price and our perception of NAV. And as we saw the price declining, we got more interested in it.

As you say, the debt that we raise is about at an effective rate of 5.87%. So, you can do the -- you can do your yield on FFO based on your own estimates for upcoming years, and you will see that there is no question that -- at least at present, there -- it is a slightly -- it is slightly diluted on an FFO basis, probably in the current year to the tune of roughly $0.01 a share in terms of what we -- what we bought. However, weighing against that mild dilution is the fact that we think on an asset value, it's just too compelling not to go forward with it.

Why not just lever the Company up with $300 million or $450 million worth of additional -- is the Fannie Mae loan structure maxed out? I mean, how much more capacity do you -- would you want to put on in terms of the secured?

No, the issue on that is -- I mean, the cost of debt within a range -- that's obviously very cheap debt. We have other sources of debt that are cheap -- maybe not quite as cheap -- and -- but are within that same range. So, that's not really a constraint. We believe that we have got plenty of dry powder to both consider additional acquisitions as they come along, as well as should we elect to do additional equity purchases.

So, that is not -- that is not really the constraint. I think the issue, as Jordan was alluding to earlier, we have a balanced approach, and we are looking for opportunities as they come along. And I think we are going to move forward in a prudent way to do so and try to be balanced about things and not put all our eggs in one basket in terms of the various things that we can do -- we are doing with our balance sheet.

My apologies for continuing on this path, but if I look at the -- first is related to the amount of capacity you have under the Fannie Mae portion here, which I think is six assets, how much more room do you have, either based on a loan to value, for those assets? And then, secondly, when I try to think about the timing, does that -- did you guys decide to take out a loan to buy back stock in the open market or was it more of a response of some inquiries coming in saying, all right, where can we raise the capital to take care of these shareholders?

Actually, we were looking at a variety of things coming up, including the fact that we purchased that other building for $32 million, and we could have left it on the line or we could have placed it permanently. And then, we looked at the various loans that we had and had discussions with a couple of our lenders, and decided that the Fannie Mae deal -- first of all, we are going to review a secured loan. You are not going to review for just what you want. You are going to take kind of the best proceeds you can get, while still holding a price at their absolute dead bottom rate. So, we made that balance, borrowed that and said, okay, let's pull it. There is a lot of [attributes] that we can pull money out of properties.

We thought that one was sized about right with what we had coming up. We had some debt we wanted to deal with on that -- for the building that we bought. We had sort of started buying stock. We didn't need to do it.

And so, what we thought was, okay, let's do this one. We talked to Fannie. We said, where is -- where or how far can we go and still hold on to your absolute best pricing? We looked at that number and said, okay, that works for us, and we took it down. I mean, you can't get everything to fit perfectly every time, and that was a good tranche to take down for the things we have going on now.

Thank you. I appreciate the color.

All right.

Congratulations on a good quarter.

Thank you.

Thank you.

Our next question comes from Jeff Miller with JMG Capital. Please go ahead.

Thanks. You guys kind of answered my questions about cap rates and the environment. But, can you just go over -- I had to pull away for a second -- your raised guidance? It was FFO of $1.14 to what?

This is Bill again. Range for '07, $1.14 to $1.17.

Okay, and that was an increase up from what was your previous guidance range?

From $1.12 to $1.16.

Great, thank you very much.

Thank you.

Our next question is a follow-up from Michael Knott. Please go ahead.

Hi, guys. Can you just give us an update on leasing conditions for both property types in Hawaii and then also just remind us how you are operating over there, and maybe just give us an update on the status of your partner over there, and how that's interacting with your portfolio?

Sure. So, beyond the leasing stats, it just happened that we just had a number of our senior management, myself and Ken Panzer included, we were just there for three days doing property tours, capital budgets, surprise inspections, the whole magilla. And we are very pleased with how things are going over there. And we were with Dick Gushman, who is our local partner over there that you're talking about, and our relationship there is still very strong.

We have a consulting arrangement with him that as we probably find properties going forward, we will convert back into the old arrangement we had where we were JVing with him the deals over there. In terms of just the market dynamics in general, I would say they are feeling pretty good over there, and similarly here, with the one constraint being that Hawaii is very short of housing and they are focused on it in a big way. And until they get significantly more housing, they are not going to be able to climb up out of that sort of bottomed, extremely low unemployment numbers. They have the lowest unemployment in the country. And when unemployment is that low, I mean, you can have a booming business and want to expand, but if you can't hire the people, there is no reason to take the additional space.

And I mean, we hear that time and again from tenants and people that are out there. But, it's working its way through the system, and I am still very optimistic about their economy. Does that answer your question?

Yes, that's helpful. And then, lastly, can you just remind us of where your leasing activity took place in general during the quarter, and maybe just comment on the gap between the 16.5% rollover that you recorded during the quarter and what sounded like a 34% or 35% mark-to-market for the entire portfolio in place versus current market?

Let me handle the latter part of that question, which is the cash increase is -- and how that compares to the overall mark-to-market. That metric again is the cash starting rents in new leases that we signed during the quarter compared to the cash expiration, and that number has been moving up rather rapidly from -- just going through the history on that in the third quarter of -- I hope I am getting this right -- the third quarter of '06, we were still rolling down on that metric, and then fourth quarter, we were rolling up 2%.

So, that number has been moving up very rapidly in sequential quarters on that metric and is kind of the one that will tend to lag because we are -- as we are rolling up cash rents that -- on leases that were signed during the height of the last market cycle that had their own bumps, the ending cash rents compared to the start rents, you get -- that tends to depress the growth compared to on a straight-line basis that takes into account the kind of annual bumps that we are getting in the leases we are doing today. So, that one is moving up kind of rapidly.

And as far as the -- kind of the market -- the sub market color on the 16.5% on a cash basis, I mean, the sub markets that were above that, were primarily the Brentwood, Santa Monica and the Sherman Oaks/Encino market performed well above that 16.5% threshold. And the markets that were below that were Warner Center and Century City, we were rolling up a high lease. One particular deal we did in Century City, so that was below that 6.5% threshold. And then, the Honolulu deal we did in the quarter two, also below that threshold. So, that kind of gives you which were the sub markets that were above and which ones were below.

Thank you.

Our next question is a follow-up from Michael Bilerman. Please go ahead.

Yes, just a follow-up on the share repurchases. Jordan, you talked a little bit about buying back, given your perception of NAV versus the decline in the stock price, as one of the reasons why you acted upon a buyback. I guess the other way could be sale of assets to sort of highlight that value. How much time have you guys given to selected asset sales in terms of kind of monetize some of that spread and highlight it to the Street?

Well, generally, I would say, as I said before, I still believe in the long-term value of our assets increasing and I definitely believe in our cash flow. Our cash flow has been increasing substantially. We had some assets before we went public that we felt like didn't work with our portfolio, and we did sell them. If you are asking me -- are you asking me why don't I sell assets in my stock or--?

I am just wondering if that was a consideration that you sort of went through and whether you are thinking about that today, as just another way to bridge that gap?

Well, I am still -- I guess a very honest answer would be I don't think that hard about selling things, because I am still on the cusp of thinking it could be a good deal to buy things. Now, I look at the -- where the stock is trading, and I said, well, that's definitely a good deal. So, I made those deals. I look at the buildings as they come up, and I'm close.

So, I guess at any time, there could be an asset, which -- I guess I'd feel like I went through that process on assets a year ago, and it's not something that I just -- I look at in as confident fashion as when I am looking at buildings that are coming up that are for sale that I could buy, because my general view, sans something very specific going on with an asset, which none of the things that I look for have changed necessarily recently, is that we're in good markets that will continue to provide good long-term growth, whether there is slight dips and rises over time. The long-term prospects of the stuff we own I feel fantastic about.

Right. In terms of the buyback in the stock, did you get any sort of discount relative to the market price for providing liquidity before the shareholders could sell?

Well, that's a question about sort of the character and the process that we went through. And we moved -- we talked about, should we go through and describe the whole thing or not, because there is some confidentiality involved and other things like that, and we decided we wouldn't, but we would see how much people will ask questions on this stuff.

So, let us pick on that whole role, and maybe next quarter, we'll figure out how we could provide more color, since it seems to be important to you.

I thought it was only going to be important as it impacts -- as the people were curious as to how much it would impact the overhang. And because -- first of all, I don't feel very threatened by big overhang being out there, and I don't fear -- and I combined that with the fact that I don't -- because I don't think there is a lot out there in the first place, and then I don't think we did much that would change that -- I didn't feel like we could say, hey, guess what, we did all these deals and now that overhang is gone.

So, because they don't -- I didn't see a lot of people that were feeling trapped and -- like I am waiting to get out as soon as I could get out. They act -- actually our -- our old investors are acting just like our new investors. I mean, they are looking at the stock price and saying, if it's going to be a good time, I think it may go up, or I'm afraid it's going to go more down, and at any moment that you talk to them, you are making decisions based on that. And so, I don't feel like I can make any prediction that would be meaningful for when their stock is registerable.

Okay. I guess on that point, did you try to even maybe try to broker a trade where you could -- if you have some of these investors that believe in your camp, that the stock is undervalued and trying to get a discount to NAV, rather than the Company buying it back, trying to broker a deal between the institutional shareholders?

I don't think -- I mean, there is a lot of rules surrounding this, and I actually significantly -- seriously doubt that we would even be allowed to do that. And in fact, with respect to our old investors, the most we are allowed to do is respond to their calls to us.

Okay. What was the breakdown between shares and units bought back?

That's another one of the things that we were trying to decide what to do with and so, at the moment, we are not having -- we are not going into it. But, maybe those are important numbers for people, and maybe we will do it next quarter.

I was just trying to get a sense of whether it was predominantly all units or whether some of it was -- were shares.

What was the timing of the buybacks during the second quarter and in July? Just so that we got the modeling right in terms of share count?

Yes, we did -- I think the -- in the supplemental, in the footnote it lays it out, but it started to give you a sense of the -- ones they were done in Q2 that are described in the supplemental, it -- I believe it's -- the first one was -- started right in the May -- May 29, around that time, and then some were done in the week or two after. So, at the end of May, early to mid-June, and then the -- and then they were -- the other ones that are described in the supplemental we did in July.

In July, but was it middle quarter, beginning or end, just from some impact to the numbers?

End.

End?

24 to 27.

Okay. And on the -- I think Jordan or Bill, you talked about the 64,000 square feet of leases that went into default in the quarter, 40,000 being subprime and 24,000 being other users. Can you just give a little bit more clarity and color on when those went dark, what's surrounding it, what sort of implications there are from a cash flow perspective and an income statement perspective, whether you have re-leased the space and whether you think you have anything else at risk in the portfolio?

Okay, this is Bill again. On the default -- the subprime defaults, as I mentioned before, were ones when we had had prior discussions on calls -- were ones that were on our radar screen when we indicated we thought we had a couple of defaults or bankruptcies that were likely to occur in Q2. And they went out, if I am remembering it right, I think it was -- I think pretty much it was the -- I think we had rent for two of the three months in the quarter on one of them, and the other one was, I think, slipped, if my memory is right.

So kind of call it half -- more or less in rough numbers about half the quarter would have been impacted from a rental standpoint on those subprime defaults. And the -- and then going forward, as I said in terms of exposure, our current monitoring of, you know, watch tenants, going forward -- at present, we are not anticipating anything other than very insignificant defaults during Q3.

Have you raised your bad debt levels at all in anticipation of this?

I don't --

For the quarter, our bad debt reserves were pretty consistent with what we incurred in the first quarter. So, I think from a trend perspective, it's not -- it's not anything out of the ordinary.

And you didn't have any major write-offs of straight line rents or anything of that magnitude relating to these leases?

No, that's right, the straight rent just kind of (inaudible - background noise) for these guys dealing with the IPO. What we have -- we had a slight acceleration, I want to say, less than $200,000 on the FAS 141, which has kind of the reverse effect that if somebody goes -- defaults on you, then you have to recognize more income for that.

And you have already re-leased the space or that's in progress?

On that -- on that particular -- on that particular space that are involved, I think you have to re-market it, but I don't think that particular space had been re-leased. But, as you can see from the Q2 leasing stats, we more than made up for that in terms of the leasing on the -- on the vacant space and cutting into that.

Yes, okay. Thank you very much.

Our next question is a follow-up from Michael Knott. Please go ahead.

Hi, guys. Sorry to beat a dead horse, but just to reiterate, there is no existing share repurchase plan authorized by the Board that allows you to go into the open market going forward, or is it -- or is there one in place?

Well, I mean -- I don't want -- I don't want to getting us to somewhere where I am talking about what's going on in our Board meetings. What I -- what I think what I said before is the accurate thing, which is that, as we go forward, we are looking at the various opportunities that we were presented with, including buying back our stock, buying buildings, what the impact is on changing our debt level, and we are making decisions as they roll forward.

Okay. Thank you.

Our next question is a follow-up from Chris Haley. Please go ahead.

Yes. Bill, so on a net basis, my -- your expectations have gone up $0.02 to $0.03. Is that a function of lower expenses or better revenue and better performance, say, on Warner Center? How would you attribute upward guidance?

Yes, I think the guidance that you are -- well, in terms of our guidance, it's obviously a combination of the two. We are -- the rents have gone up at a faster clip, and our other economic terms, like the annual rent bumps and so on, are beyond the expectations that we had earlier in the year in terms of how they had been absorbed in the market. So, we are feeling -- we are feeling good about that. And [in other words], as you are suggesting, we had some lower operating expenses. So, it's clearly a mix.

Thank you.

And at this time, there are no additional questions in the queue. I would like to turn the call back over to Mr. Jordan for his concluding remarks -- Mr. Kaplan, my apologies.

Well, thank you, everybody, for joining us today, and we look forward to speaking with you at our next quarterly call. Bye-bye.

Ladies and gentlemen, this does conclude Douglas Emmett's second quarter 2007 earnings conference call. You may now disconnect.